Monetary Pol cy and O l Pr ce Surges n N ger ausers.ox.ac.uk/~cadam/pdfs/Chapter 6 from NPP.pdf ·...

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6MonetaryPol�cyandO�lPr�ceSurges�nN�ger�aChristopher Adam1 and Benedikt Goderis

6.1� Introduction

Themanagementofo�lrevenues�sthepast,presentandfutureofmacroeconom�cpolicy in Nigeria. As Paul Collier describes (Chapter 2), the long history of fiscal m�smanagementofo�lbooms�nN�ger�asawtheCentralBankofN�ger�a’sab�l�tytopursueacoherentmonetarypol�cyseverelyc�rcumscr�bed.W�thoutthesupportofa disciplined and broadly predictable fiscal stance, the Central Bank was unable to make credible commitments to an inflation target or, indeed, to any other intermedi-ate target suchas themoney supplyor the exchange rate.Monetarypol�cycouldnot reliably anchor inflation expectations. Since the turn of the century, however, thelandscapehasstartedtochange.Harnessedtoastrongerpol�t�calcomm�tment,the successful consolidation in the financial sector concluded at the end of 2005 and the de facto unification of the foreign exchange markets in early 2006, measures suchastheF�scalRespons�b�l�tyB�ll,currentlywork�ng�tswaythroughtheleg�s-lature, are laying the foundations for improved fiscal management of oil revenues. As a result, and for possibly the first time in its history, the prospects now exist for genu�nely‘�ndependent’CentralBank�ng�nN�ger�a.Itnowmakessensetocons�dermonetarypol�cyplay�ngamorecentralrole�nshort-runmacroeconom�cmanage-ment�nN�ger�a.

In this chapter, we are concerned with just one specific aspect of this manage-ment challenge. Specifically, we use a formal model that examines the properties of alternative monetary policy rules geared towards the efficient macroeconomic managementofshort-runvolat�l�ty�no�lrevenues.Inthemodel,westartfromthepremise that the Central Bank sees its core remit as pursuing low and stable inflation, even though it does not at present explicitly see itself as an ‘inflation targeter’. How-ever,wealsoassumethat,qu�tereasonably,otherconcernscompetefortheCentralBank’sattent�on.F�rst,theremaybeananx�etyaboutthelevelandvolat�l�tyofthenom�nalandrealexchangerates.Fearsofadverse‘Dutchd�sease’effectsaccompa-ny�ngo�lsurgesmaydrawtheauthor�t�es�ntoattemptstopreventthetemporary(or

1�� Adam and Goderis

pers�stent)apprec�at�onoftherealexchangerate�nordertoforestallperce�vedlosses�ncompet�t�veness.Butconcernsaboutexchangeratevolat�l�tymaycentrelessonthequest�onofcompet�t�veness thanon thepol�t�calcostsof temporaryexchangerate appreciations which first confer big income gains on net consumers of imported goodsbeforerevers�ngthem.TheCentralBankmayalsobeconcernedabout�nter-est rate volat�l�ty.Attempts to addressnom�nal (and real) exchange ratevolat�l�tythrough exchange rate intervention – a fear of floating – are often accompanied by abel�efthatsomeformofdomest�cl�qu�d�tyster�l�zat�on�snecessarytodel�veronan inflation target. Sterilization, in turn, raises concerns over interest rate volatility, the effects on private investment, and the quasi-fiscal burden of increased domestic borrow�ng.F�nally,theCentralBankmayalsoseektoavo�dexcess�vevolat�l�ty�noutput,part�cularly�nthenon-tradablesectorwherepr�cesaremorel�kelytoadjustslugg�shlytodemandshocks.

Thechallengefac�ngtheCentralBank�ndeal�ngw�tho�lpr�cesurges�sto�dent�-fyoperat�onalmonetaryrulesthatnav�gatethesecompet�ngconcernsw�thoutlos�ngtheir anchor on inflation, or, more precisely, inflation expectations. This challenge can be distilled into three specific questions. First, to what extent does it make sense forthemonetaryauthor�t�estoseektomanagethepathofthenom�nalexchangerate,if at all? Second, what is the role for using official foreign reserves as a buffer to smooth the spending and absorption of the oil windfall? Finally, how should windfall-related liquidity growth be sterilized, through bond sales or foreign exchange sales? Th�schapter,therefore,contr�butestothemak�ngofmonetarypol�cy�nN�ger�abyexam�n�ngtheperformanceofasmallsetofalternat�vemonetarypol�cyrules�nthefaceofvolat�leo�lpr�ces,hold�ngothersourcesofvolat�l�tyconstant.

Two central messages emerge from our analysis. The first is that, when the fiscal response to oil surges significantly alters the path of domestic deficit financing needs, strategies involving significant foreign exchange intervention to offset the incipient nom�nalexchangerateapprec�at�ondel�verlessvolat�leoutcomesthanthosewh�challow the exchange rate to float freely. This intervention can be achieved by sim-plerulesthatmatchfore�gnexchange�ntervent�ond�rectlytothesav�ngoutofthew�ndfall(whatwerefertoasabuffer-plus-float)orthroughanexpl�c�texchange rate crawla�medatkeep�ngtherateofnom�nalexchangeratedeprec�at�onclosetothelong-run inflation target. Both rules are much more effective at reducing short-run real and nominal volatility than a pure float. Second, judged solely against the narrow cr�ter�aofm�n�m�z�ngshort-runpr�ce,exchangerateandoutputvolat�l�ty,thecrawl outperforms the buffer-plus-float. However, if, in addition to targeting macroeco-nom�cvolat�l�ty,theauthor�t�esarealsoconcernedtodevelopthestructuralperform-ance of domestic finance markets by promoting greater market-based exchange rate determination, the balance tips in favour of the buffer-plus-float.

Thesecondma�nmessage�sthat,�nthefaceofano�lpr�cesurge,theconvent�on-alcasefordomest�cbondster�l�zat�onmaybeweakerthanconvent�onallythought,

Monetary Policy and Oil Price Surges in Nigeria 1��

evenwhentheauthor�t�es’fore�gnexchangerate�ntervent�onleadstoagrowth�ndomest�cl�qu�d�ty.Thereason�sthatthecomb�nat�onof�ncomegrowthandare-duction in expected inflation arising from fiscal consolidation serves to increase the demandfordomest�cmoneytherebywarrant�ngthegrowth�nl�qu�d�tyar�s�ngfromthe authorities’ accumulation of official net international reserves. Indeed, there may evenbeacasefor‘reversester�l�zat�on’wherepartoftheo�lw�ndfall�susedtobuybackdomest�cdebt.Th�smayservetwopurposes.F�rst,adebtbuy-backservestocrowd �npr�vate �nvestmentby temporar�ly lower�ng the real �nterest rate.At thesamet�me,adebtbuy-backatthebeg�nn�ngofano�lsurgecreates‘space’forthemonetaryauthor�t�estomoreeffect�velymanagetheendofano�lpr�cesurge,espe-cially in circumstances where the fiscal authorities cannot credibly commit to adjust-�ngexpend�ture�mmed�atelyasw�ndfallrevenued�sappears.

Three�mportantcaveatsapplytoourmodel-basedanalys�s,however.F�rst,thestrengthof thecase for fore�gnexchange �ntervent�on,andaga�nstbondster�l�za-t�on,�nthefaceofo�lsurgesdepends�nt�matelyontheassumedsens�t�v�tyoftheprivate sector’s demand for money to changes in expected inflation, and how heav-ily it discounts the future. Our simulations attempt to reflect the view that in con-temporary Nigeria, especially as reforms in the financial sector begin to take root, portfol�oeffectsappeartoberelat�velystrong.However,theseareonlymodel-basedassumptions: if in reality the inflation elasticity is low and horizons are short, portfo-l�oeffectsonthedemandformoneyw�llweaken,thed�st�nct�onbetweenalternat�veexchangeraterulesw�llbelessstark,andthecaseforadebtbuy-backlesspower-ful.Second,theanalys�sreportedbelow�sbasedonamodelwh�chde-emphas�zestheroleofthebank�ngsystem�nthetransm�ss�onofmonetarypol�cyandhencetheresultsdonotdojust�cetothefullrangeofpol�cy�nstrumentsava�labletotheCen-tralBank.F�nally,andmost�mportantly,wemustre�terateaself-ev�denttruthaboutmonetarypol�cy�nN�ger�a.W�tho�lrevenuesconst�tut�ngsuchadom�nantshareoftotal fiscal receipts, it will always be the case that monetary policy is conducted in the shadowofthefiscal managementofo�lrevenues.Wh�lst�tmaybeposs�blefortheCentral Bank to lean against weak fiscal management in the short run – for example byrely�ngheav�lyonquant�tat�vecontrolssuchasreserverequ�rementsandCentralBank liabilities to mop up excess domestic liquidity – no long-run inflation target can succeed without a supportive fiscal policy. It follows, therefore, that, in the absence of a compatible fiscal policy, monetary policy options will remain heavily proscribed and strongly influenced by concerns about managing unsustainable liquidity growth. Other chapters in this volume address these broader issues of fiscal management directly; given the specific objectives of this chapter, we assume the existence of a broadly coherent fiscal stance.

Therema�nderofthechapter�sstructuredasfollows.Sect�on6.2setsthescenebyprov�d�ngabr�efsketchoftherelevantmonetarycond�t�ons�ncontemporaryN�-ger�a.InSect�on6.3wemot�vatetheformals�mulat�onanalys�sbyestabl�sh�ngthe

1�0 Adam and Goderis

ma�nl�nesofourargument,and�nSect�on6.4wepresentandd�scussthes�mulat�onresults. Section 6.5 concludes with some brief comments on the question of fiscal cred�b�l�ty.

6.2� Monetary�policy�objectives�and�practice�in�contemporary�Nigeria

Inrecentdecadesthedeclaredobject�veofmonetarypol�cy�nN�ger�ahasbeentoatta�nbothpr�cestab�l�tyandexchangeratestab�l�ty.Thereal�tyhas,however,beenrather different. Average inflation, which had stood at around 30 per cent per annum frommostofthetwodecadess�ncethe1974–1979o�lpr�ceboom,hasfallenbuthascont�nuedtobevolat�le(F�gure6.1).

Bat�n�(2004)h�ghl�ghtstworeasonsforN�ger�a’srelat�velypoorh�stor�calrecordon inflation control. The first is a chronic ‘fiscal dominance’ problem which has fre-quently obliged the Central Bank to finance large and volatile fiscal deficits, and the second�sthepol�cy�ncoherencear�s�ngfromattemptstosat�sfytheso-called‘�m-poss�bletr�n�ty’ofmonetarypol�cy.Th�sholdsthat,�ncountr�esw�thanopencap�talaccount,moneysupplyandexchangeratetargetscannotbepursueds�multaneouslysothat,atsomepo�nt�nt�me,thesetwoobject�vesw�llrequ�remutually�ncompat-�blepol�cyact�onsw�ththeconsequencethate�therorbothtargetsw�llbejeopard-�zed.Thesetens�onsbetweenmoneysupplyandexchangerateobject�vesrema�nsothat,wh�letheauthor�t�esrema�npubl�clycomm�ttedtoaprogramme�nwh�chbroadmoneygrowth�sthepr�nc�palanchor,concernsaboutthepathoftheexchangeratearerarelyfarfromthesurface.2

Greatercoherencehasemerged�nrecentyears,however,promoted�npartbytheNat�onalEconom�cEmpowermentandDevelopmentStrategy(NEEDS)framework.A central pillar of NEEDS has been the development of an oil-price based fiscal rule, endorsedbythefederal,stateandlocalgovernments,underwh�chthew�ndfallo�l

Figure 1: Inflation, 1999-2006

(12-month percentage change in CPI)

-5%

0%

5%

10%

15%

20%

25%

30%

M1

1999

M5

1999

M9

1999

M1

2000

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M1

2001

M5

2001

M9

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M5

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M9

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M1

2005

M5

2005

M9

2005

M1

2006

M5

2006

Source: International Financial Statistics, IMF

Figure �.1 Inflation 1999–2006 (12-month percentage change in CPI).Source:Internat�onalF�nanc�alStat�st�cs,IMF.

Monetary Policy and Oil Price Surges in Nigeria 1�1

revenues in excess of a budget reference price are saved. Under this rule, the fiscal stancehas�mprovedsubstant�ally�nthelastfewyears,desp�tethepressurestospendthe large increase in oil revenue. The overall fiscal balance moved from a deficit of around4percentofGDP�n2001and2002toasurplusofroughlythesameorderofmagn�tude�n2004and2005,wh�lethedomest�cdebtrat�ofellbyaround5percent-age points of GDP over the same period. The focus on improving fiscal discipline has alsounderp�nnedtheF�scalRespons�b�l�tyB�ll(FRB)–underrev�ewbytheNat�onalAssemblyatthet�meofwr�t�ng–wh�chseekstoestabl�shbettercoord�nat�onofthefiscal policies of federal, state and local governments through formal fiscal rules and enhanced fiscal transparency and accountability, the lack of which has long been a problem�nN�ger�a(seeBox6.1).

Box �.1 Allocation of oil resources and fiscal decentralization in Nigeria

The allocation of oil resources and fiscal decentralization in Nigeria has long beenatop�cofmuchcontroversy.Thepresentsystem,embedded�nthecon-st�tut�on, allocates a large share of revenues to the state and local govern-ments.Inpart�cular,twocategor�esofrevenuearesharedbythefederal,stateand local governments. The first consists of oil revenues net of expenditures, called‘F�rstCharges’,plustaxrevenuecollectedbythefederalgovernmentonbehalfofthefederat�on.Th�srevenue�sknownastheFederat�onAccountrevenueand�sallocatedaccord�ngtoarulethathaschangedovertheyears.In2001,theruleallocated48.5percentoftherevenuetothefederalgovern-ment,24percenttothestategovernment,20percenttothelocalgovernment,and 3.5per cent to spec�al funds.The rema�n�ng 4per cent was or�g�nallymeantforotherpurposesbut�snowreallocatedtothethreegovernmentlev-els.Thesecondcategoryofrevenue,thevalueaddedtax,�salsocollectedatthefederallevelbut�sallocatedtothethreelevelsofgovernmentaccord�ngtoad�fferentrule.In2001,50percentoftherevenuewasallocatedtothelocalgovernments,whereasthestateandfederalgovernmentsrece�ved35percentand15percent,respect�vely.

Wh�le a large shareof the revenuesgoes to the state and local govern-ments, the responsibility for consolidated fiscal policy and macroeconomic stab�l�ty l�es at the level of the federal government.At the same t�me, thelocalandstategovernmentsareallowedtoborrowdomest�callyandholdnoresponsibility for fiscal prudence and macroeconomic stability. As a result, the current institutional structure makes it difficult for the federal government to exert control over the aggregated fiscal policy stance. It is this situation the Fiscal Responsibility Bill (2006) seeks to address by providing for formal fis-cal rules aimed at improved coordination of the fiscal policies of federal, state andlocalgovernments.


Althoughthelong-termsuccessofthecurrent�n�t�at�vesrema�nstobeseen,thefirst important and unprecedented steps have been made towards a sustainable fiscal policy framework. This improved fiscal outlook has immediate consequences for the conduct of monetary policy as well. In the presence of a certain degree of fiscal d�sc�pl�neandacred�blemoneytarget�ngreg�me,thequest�onar�seshowtheotherobject�veoftheCentralBank,exchangeratestab�l�ty,shouldbev�ewed,part�cularly�nthefaceofvolat�leo�lpr�ces.It�stothese�ssuesthatwenowturn.

6.3� A�simple�framework�for�monetary�policy�analysis�

6.3.1� The�basic�structure�

Successfulmonetarymanagementofvolat�leo�lrevenuesturnsonhowth�svolat�l�tytranslates into volatility in domestic deficit financing (‘seigniorage’). As we show, this becomes a particularly important issue if fiscal policy is geared towards saving some of the oil windfall, either to reduce reliance on domestic deficit financing or to smooth the profile of government expenditure for a given fiscal stance (or some comb�nat�onofthetwo).Insuchc�rcumstances,s�mplemonetaryruleswh�chstab�-lize the path of domestic financing through more or less exchange rate intervention turnouttohaveattract�vepropert�es.Thereasonforth�s�sasfollows:convent�onalwisdom concerning the choice of exchange rate regimes suggests that a floating ex-changeratereg�meofferstheeconomythebestprotect�onaga�nstreal shockswh�lea fixed (or crawling peg) regime provides better protection against portfolio shocks.Thed�st�nct�ve featureofo�lpr�ce surges �nN�ger�a �s that,wh�le theor�g�nat�ngshock is real, the authorities’ fiscal choices, which alter the path of domestic deficit financing, convert the real shock into a mixed real and portfolio shock thus shifting thebalance�nfavourofadegreeof�ntervent�ona�medatmanag�ngthepathoftheexchangerate.

We examine the properties of two specific rules which achieve this objective, albeit in different ways. The first, which we refer to as a buffer-plus-float,d�rectlysta-b�l�zesthepathofse�gn�oragebysynchron�z�ngfore�gnexchangesalestothegrowth�nl�qu�d�tygeneratedbydomest�cspend�ngoutoftheo�lw�ndfall.Th�senta�ls�n�-tially accumulating oil proceeds as official foreign exchange reserves and then steri-l�z�ngthefulldomest�ccurrencycounterpartofnon-�mportspend�ngthroughfore�gnexchangesalesas�toccurs.3

Thesecondrule,anexchangeratecrawl,doesnottargetl�qu�d�tygrowthd�rectlybutrathertheauthor�t�es�ntervene�nthefore�gnexchangemarkettokeepthenom�-nalexchangeratecloseto�tslong-runequ�l�br�umrateofdeprec�at�on.Inth�scase,fore�gnexchange�ntervent�onrespondstothelatentpressurescom�ngthroughthepr�vateportfol�ocho�ces(betweenhold�ngdomest�candfore�gndenom�natedassets)


which, in turn, reflect underlying changes in the supply of domestic liquidity arising from the fiscal intervention.

Thes�mulat�onresultspresentedlater �nth�schapterareder�vedfromamodelbasedonO’Connellet al.(2006).4Althoughthemodel�tself�squ�tedeta�led,�tscen-tral�ns�ghtscanbeder�vedd�rectlyfromthebas�caccount�ng�dent�t�esthatframethe set of policy choices. The first is the consolidated budget constraint of the public sector which we define in naira terms as

( )S T E F DF H B NIRt t

ot t t t t t

− − = = + −∆ ∆ ∆ ∆ (6.1)

where S G i B E i F Tt t t

dt t t

ft t

no= + + −− −( )1 1

�s thenon-oil overall fiscal deficit before foreign financing, G�sconsol�datedgovernmentexpend�ture,B andF representdo-mest�c and external debt respect�vely (w�th domest�c and fore�gn �nterest rates idandif),E �sthenom�nalexchangerate,Tno�stotalnon-o�lrevenue,andTow�ndfallrevenuefromtheo�lsector.DF

i is therefore domestic financing of the consolidated

public sector deficit. Equation (6.1) states that the fiscal deficit net of oil and any foreign financing is ultimately financed through some combination of the growth in themonetarybase(∆H),growth�npubl�csectordomest�cdebt(∆B),anddeplet�onof official net international reserves (–∆NIR).

The left hand side of (6.1) is the traditional province of fiscal policy. The fiscal spending decision determines the overall public sector domestic deficit net of oil proceeds period by period. In what follows we shall ignore the role of official foreign financing of the budget. For Nigeria this is of second-order importance to the overall budget: what really matters is the evolution of the fiscal deficit net of the oil windfall, ( )S T

t to− .Thedoma�nofmonetarypol�cy�sthenthecompositionofther�ght-hand

s�deof(6.1),tak�ngthelefthands�deasg�ven.Cho�cesovertheexchangerateare�mplementedby thedegree towh�ch themonetaryauthor�t�es target theevolut�onof official net international reserves. Net of choices over domestic debt issues (∆B),se�gn�orage(∆H) is the residual financing item which may, of course, be an interme-d�atepol�cytarget.5

It may also be the case that the fiscal authority explicitly chooses to run a foreign reservebufferaspartofastrategytosmooth�tsownexpend�ture.Inth�scasewecanre-define (6.1) as

( )S T E F NIR DF H B NIRt t

ot t

Gt t t

C

t t− − + = = + −∆ ∆ ∆ ∆ ∆

(6.1a)

wherethesuperscr�ptsG andC denotereserveaccumulat�ondec�s�onsexerc�sedbythe fiscal and monetary authorities respectively.

These fiscal and monetary choices necessarily feed back onto the evolution of the external balance which can be defined as


− − =∆ ∆NFA NIR CAD Xno o - (6.2)

whereCADno is the non-oil current account deficit, Xorepresentsneto�lproceedsandNFA pr�vatenetfore�gnassets,andNIR = NIRG + NIRC. From (6.2), fiscal and mon-etary policy choices directly influence the contribution of official reserves to overall current account financing, which, in conjunction with the private sector’s decision on net foreign asset accumulation, determines the extent to which the oil inflow is absorbed�ntothedomest�ceconomy.Thepr�vatesector’sportfol�ocho�ce,�notherwordsthe�rallocat�onofwealthbetweendomest�cbonds(B),fore�gnassets(NFA)anddomest�cassets(H),comb�nedw�ththeauthor�t�es’dec�s�onsoverthesupplyofdomestic liquidity simultaneously determine the real interest rate, inflation expecta-t�onsandthepr�vatecap�talaccountresponsetotheo�lw�ndfall.Thesetwocho�cesplayacentralrole�nshap�ngtheshort-runmacroeconom�cresponseoftheeconomytotheo�lpr�cesurge.

6.3.2� Formal�model�structure�

Themodel�sastyl�zedshort-runopeneconomymodelw�thcurrencysubst�tut�on.Ontheconsumpt�ons�de,households(character�zedherebyarepresentat�veagent)consumetradableandnon-tradablegoods,w�ththecompos�t�onofexpend�turebe�ngdeterm�nedbytherealexchangerate,g�ventheparametersgovern�ngtheelast�c�tyof substitution. Their net financial wealth is held in terms of three assets: domes-t�cgovernmentdebt,moneyandfore�gncurrency.Importantly,however,ne�thertherepresentat�vehouseholdnorthegovernmentarefully�ntegrated�ntoworldcap�talmarkets.Hence,wh�le thepr�vate sectorcanaccumulate fore�gncurrency, �tdoesnothaved�rect,unrat�onedaccesstoworldcap�talmarkets.S�m�larly,worldcap�talmarketshavenoappet�teforN�ger�angovernmentdebt.Domest�cpubl�cdebt,onthe other hand, is marketed but, given the lack of openness of the official capital ac-count,�t�s,�neffect,non-tradable.Theseassumpt�onsmaynotbewhollyreal�st�c,butaremadetoallowfortwo�mportantfeaturesthatdocharacter�zetheN�ger�aneconomy. The first is that domestic interest rates are not tied down by interest parity cond�t�onsbutratherw�llmovew�thsupplyanddemandcond�t�ons�ndomest�cmar-kets – which are in turn influenced by fiscal and monetary policy choices – and the second�sthatthepr�vatesectorcap�talaccountw�llconst�tutean�mportantchannelforadjustmenttoo�lw�ndfalls.

Thepr�vatesector’sna�ramoneydemanddependson�tslevelofexpend�tureandtherelat�veopportun�tycostofhold�ngdomest�corfore�gncurrency.Thesens�t�v�tyofrelat�vecurrencydemandtotheseopportun�tycosts�san�ncreas�ngfunct�onoftheelast�c�tyofcurrencysubst�tut�on.Hold�ngthenom�nal�nterestrateconstant,an�ncrease�nexpectedexchangeratedeprec�at�onsh�ftsdes�redportfol�os�nfavouroffore�gncurrency.Theh�ghertheelast�c�tyofsubst�tut�onbetweendomest�candfor-


e�gnmoneyforanyg�venchange�nrelat�vereturns,thestrongerthedes�redportfol�oreallocat�onandthereforethegreaterthepressureonthenom�nalexchangerate�nresponsetoshocks.Wedonothaveanyrel�ableemp�r�calest�matesofthes�zeofth�sparameterforN�ger�a,or�ndeedforotherAfr�cancountr�es,andso�nth�schapterwesetth�selast�c�tyataroundthem�d-rangevaluesfromtheev�denceonLat�nAmer�-canandotheremerg�ngmarkets.G�venthecal�brat�onvaluesused�nthemodel,th�simplies an inflation elasticity of the demand for money of around 0.45.

Output cons�sts of three forms: a non-tradable good, o�l, and non-o�l tradableoutput;although,forN�ger�a,th�sth�rdcomponentrepresentsarelat�velysmallshareof totalproduct�on.Pr�cesfor tradablegoods(ontheproduct�onandconsumpt�ons�des)aredeterm�ned�nworldmarkets,wh�lefornon-tradablesweallowforsomepr�cest�ck�ness(Calvo,1983).

Themodel�sdes�gnedtocons�der�ssuesofshort-runvolat�l�tyratherthanlonger-term response tosustained o�lpr�ce surges.Hence, aswedescr�bebelow,weex-am�ne the responseof theeconomytoonly the temporarycomponentofo�lpr�cemovements.Themodeldoesnotconcern�tselfw�ththemed�um-termevolut�onoftheeconomy �n response to susta�nedo�lpr�ce �ncreases.6 Specifically, we do not cons�derthesupply-s�deresponsetotheo�lw�ndfall.Thus,thevolumeoftradableoutput is fixed, although the sticky-price assumption means non-tradable output is demanddeterm�ned.

6.3.3� Oil�shocks�and�policy�responses

We use th�s model to exam�ne the propert�es of alternat�ve responses to o�l pr�cevolat�l�tyhold�ngconstantallothersourcesofshort-runmacroeconom�cvolat�l�ty.Inreal�ty,therelevantvolat�l�ty�s�nthevalueofo�lproceedswh�chcomb�nevar�at�ons�nproduct�onandexportsw�thvar�at�ons�ntheworldpr�ceforN�ger�ano�l.Inthe�nterestsofs�mpl�c�ty,however,weassumethatthevolumeofo�loutput�sconstantand thatallvolat�l�tyar�ses fromvar�at�ons �n theo�lpr�ce.Tofocusattent�ononshort-runvolat�l�tywerepresenttheevolut�onoftheo�lpr�ce�ntermsofthefollow-ing first-order autoregression:

( ) ( )p p p poil oilt

oil oilt t

− = + − +−% %γ γ ε0 1 1

(6.3)

where ptoil �sthelogoftheworldpr�ceforN�ger�anForcadoscrudeo�l�nconstant

USdollars,and %poilt representsasmoothedstochast�ctrendest�matedus�ngtheHo-

drick–Prescott filter. The key estimated parameters are ε̂t,thes�zeoftheo�lshock

relat�veto trend,and γ̂1

, �tspers�stenceover t�me.Equat�on(6.3) �sest�matedonquarterly data from 1980(Q1) to 2005(Q4). The fitted trend and residual are shown �nF�gure6.2.Fromtheest�mat�onweobta�nameanpr�ceshockofapprox�mately12.5percentandapers�stenceparameterofapprox�mately0.65.G�ventheshareof


1980 1985 1990 1995 2000 2005

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Log spot price for Nigerian Forcados crude oil (constant US p er b a rre l ) 1980!2005

Log spot oil price (Us / bb l)Deviation from Trend

Hodrick-Prescott trend

Figure �.� Log spot pr�ce for N�ger�an Forcados crude o�l (constant US$ per barrel)1980–2005.

o�l �n totalgovernment revenue, th�s translates �ntoa revenueshockof justunder3.7percentoftotalrevenueperquarter.

Other parameters cal�brat�ng the model to the key structural character�st�cs ofthe Nigerian economy are based on data for the period 2000–2004 so as to reflect thestructureoftheeconomypr�ortothemostrecento�lpr�cesurge.Deta�lsoftheseparametersareprov�ded�nAppend�xTable6.A1.

6.3.4� Fiscal�and�monetary�rules�

Our fiscal and monetary policy rules abstract from much of the detail of institutional structures in Nigeria but are sufficiently rich to reflect the principal macroeconomic choices confronting fiscal and monetary authorities. Given our concern with domes-tic financing we focus on the consolidated budget. On the revenue side we treat all non-o�lsourcesofrevenueasconstantsothato�lrevenue�stheonlysourceofrev-enuevolat�l�ty.Cho�cesaremorevar�edontheexpend�tures�de.F�rst,weassumethe fiscal authorities can choose either to fully spend the oil revenue windfall or to save some portion of it. Specifically when oil revenues move above their long-run mean,aport�onof the �ncreasemaybedevotedtoreduc�ngthegovernment’sdo-mestic financing needs; this we refer to as the deficit-reducing (dr) componentofthew�ndfall.Intheexper�mentsreportedbelow,weallowth�ssav�ngtoaccountforuptoaquarterofthew�ndfall.7 Second, and in addition, the fiscal authorities may also run an explicit fiscal reserve programme aimed at smoothing the path of government expend�turerelat�vetothepathofthew�ndfall.Th�smaybeforconvent�onalcon-


sumpt�on-smooth�ngreasonsortoavo�dshort-run‘construct�onboom’effects.Th�sexpend�turesmooth�ng�sach�evedthroughd�rectreserveaccumulat�ononthepartof the fiscal authorities through the operation of a ‘reserve account’. In the face of ano�lsurgethegovernmentspendseachper�odaconstantfract�on, µ,ofthebalance�nthereserveaccountwh�chcons�stsoftheopen�ngbalance�ntheaccountplusthew�ndfallrevenueaccru�ngdur�ngtheper�od:

g W W drt t t

ot

= = + −−µ µ τ[ ( ) ]1

1 (6.4)

wheregt�sgovernmentexpend�ture,τ

to �stherevenuevalueoftheo�lw�ndfall,dr �s

the proportion of the windfall devoted to reducing the domestic deficit, and Wt�sthe

reserveaccount.Asµ‡1 the profile of expenditure matches that of the windfall. In the simulations reported below we fix µ=0.5.G�ventheest�matedpers�stenceoftheo�lpr�ceshockof0.65,thehalf-l�feofthetyp�calshock�sjustoveroneyear,w�th82percentofthew�ndfallbe�ngrece�vedw�th�nfouryears.W�thµ=0.5,thehalf-l�feofspend�ng�sjustovertwoyearsw�thonly68percentofthew�ndfallbe�ngspentw�th�n four years.A value ofµ=0.25 would �ncrease the half-l�fe of spend�ng toalmost four years. From a financing perspective, smoothing is different from deficit reduct�ons�nceeventuallythefullvalueoftheo�lw�ndfall�stranslated�ntospend-ing. Smoothing alters the time-profile of spending and domestic deficit financing but not the present value; deficit reduction alters the present value. In terms of the s�mulat�onsreportedbelow,�t�sthelatterthathasthestronger�mpactonthepathofdomestic financing and hence the dynamics of inflation and the exchange rate.

Theth�rdd�mens�onofexpend�turecho�cesconcernsthecompos�t�onofspend-�ng.Wed�st�ngu�sh threealternat�ves.Atoneextreme–ourreferences�mulat�ons–werepresentspend�ngascons�st�ngofad�recttransfertohouseholdbymeansoflump-sumtransfers;th�s�s,�neffect,avers�onofthemechan�smd�scussedbySala-�-Mart�nandSubraman�an(2003)w�thspend�ngdec�s�onsoutoftheo�lw�ndfallfullyal�gnedw�ththepr�vatesector’spreferences,�nclud�ngthe�rdes�retosmoothcon-sumpt�on�nter-temporally.Attheotherextremeweassumes�mpleallocat�onrulesunderwh�chpubl�cspend�ngat themarg�n �sallocatedonacurrent-�ncomebas�sbetweentradableandnon-tradablegoods.Under th�scharacter�zat�onwecons�derthe propensity to spend out of the windfall (net of any deficit reduction) to be unity andspend�ngtobeallocatedbetweentradabletonon-tradablegoods�ntherat�oof0.15to0.85.

These three fiscal settings provide the background to the monetary policy rules. In �tscurrentformourmodel�srelat�velys�mpleand,�npart�cular,doesnotaffordanexpl�c�troleforthebank�ngsystem.Th�smeans,amongstotherth�ngs,thatthefullrangeofmonetarypol�cy�nstruments,part�cularlytheuseofreserverequ�rementsorstatutorydepos�t�nstrumentsandotherquant�ty-based�nstruments,cannotbe�nves-t�gated.Hencemonetarypol�cycho�cescentreontheCentralBank’stransact�ons�n


fore�gnexchangeand�ngovernmentsecur�t�es.Fore�gnexchange�ntervent�onscanbesummar�zed�nthefollow�ngreact�onfunct�on:

∆z z E z dr z z zt t t t− −= − ⋅ + ⋅ − ⋅ −

1 1 20

3 1 0& . ( ),τ (6.5)

wherez0 is the initial steady-state level of official reserves under the management

oftheCentralBankand &Et therateofdeprec�at�onof thenom�nalexchangerate.

Theparametersz1andz

3governthedegreeofcomm�tmenttothesteady-staterate

of crawl, which is tied down by the long-run inflation rate, and the speed with which �ntervent�on�seventuallyunwound.Asz

1‡ ∞andz

3‡0,thereg�meapproachesa

predeterm�nedcrawl.Lowervaluesofz1representloosercomm�tmentstotherefer-

encerateofcrawl.Forz1=0 the exchange rate floats: Central Bank intervention, if

any,�s�ndependentofmovements�nthenom�nalexchangerate.8Thetermz2allows

theCentralBanktot�efore�gnexchangesalesd�rectlytothet�mepathofw�ndfall-�nducedgovernmentspend�ng.Apol�cyofz

2=1andz

1=0correspondstothebuffer-

plus-float strategy�nwh�chtheCentralBanksells theo�lrevenueproceeds�n theprecise amount required to finance the domestic currency value of windfall-induced spend�ng,wh�lethedrcomponent�sthenaccumulatedasreserves.Lowervaluesofz

2�nducesmallerfore�gnexchangesalesandgreaterreserveaccumulat�on,�mply�ng

fasterexpans�onofthemonetarybase,otherth�ngsbe�ngequal.9

Inadd�t�on,theCentralBankcanengage�nopenmarketoperat�ons�nthedomes-t�cbondmarkets.Bondoperat�onsaredescr�bedbythefollow�ngreact�onfunct�on:

p b b j b dr b p b bt t

Pt t t

PtP∆ ∆= + + − −1 2

03 1

. ( ),τ (6.6)

wherej denotes the sum of reserves under the management of the fiscal authorities (W) andtheCentralBank�tself(z).Forb

1>0,bondoperat�onsareusedtooffseta

port�onofthe�mpactoffore�gnexchange�ntervent�ononthemonetarybase,wh�leforb

2>0w�thz

2=1,�ntervent�on�susedtoster�l�zetheeffectoftheaccumulat�onof

reservesaga�nstthesav�ngsofgovernment,whereasastrategyof b2>0w�thz

2=1

representsareversester�l�zat�onordebtbuy-backoperat�on.10

Bothfore�gnexchangeoperat�onsandbondoperat�onsareunwoundovert�me,atratesdeterm�nedbyz

3andb

3.Theseensurethatreserveseventuallyreturntothe�r

or�g�nalsteady-statelevel,sothato�lw�ndfallsareult�matelyfullyabsorbedregard-lessofthevaluesofz

1,z

2anddr, and leave interest payments and the fiscal deficit

unchanged in the long run, as required by consistency with the long-run inflation target.


6.4� Results

6.4.1� Core�results:�impulse�response�functions

Webeg�nbypresent�ngas�mplesetofreferencerunsaga�nstwh�chlateranalys�scanbeevaluated.Table6.1reportsthe�mpulseresponsefunct�onsforaone-t�mepos�-t�veshocktotheo�lpr�ceunderthreealternat�veexchangeraterules.Indo�ngso,weemphasize the effect of fiscal saving. In the first case, reported in panels A and B, we assumethattheproceedsoftheo�lw�ndfallarefullyspent–butnot‘overspent’–asandwhentheyarr�ve.Governmentexpend�turethereforefollows,na�raforna�ra,ther�seandfall�no�lrevenuesoverthedurat�onoftheshock.Inth�sbasecase,govern-mentspend�ng�s�ntheformofd�recttransferstotherepresentat�vepr�vateagent.Inthe second case, reported in panels C, D and E, we assume that the fiscal authorities use one quarter of the windfall revenue to reduce the demands on domestic deficit financing. In the context of equation (6.1) therefore, panels A and B correspond to the casewhereDF �sunchanged,atleastd�rectly,wh�lepanelsC,DandEcorrespondtothecasewhereDF falls.

Twoprel�m�narypo�ntsshouldaga�nbestressed.F�rst, themodel�sstat�onary.Theo�lpr�ce shock �s temporaryand theeconomyrevertseventually to �ts �n�t�alequ�l�br�um.Second,andrelated,theexchangeratereg�me�sneutral�nthelong-runeventhougheachhasd�fferentshort-run�mpl�cat�onsandd�fferent�mpl�cat�onsfortheout-of-steady-statevolat�l�tyoftheeconomy.Thesearedes�gncho�cesallow�ngustofocusonshort-run,day-to-day,monetarymanagement�ssues.Buttheymeanthatwedonotengagew�th�ssuesofthemed�um-termresponsetopers�stentsurges�ntheo�lpr�ce,�nclud�ngquest�onsofopt�malo�lextract�on,�nvestmentbehav�our,the long-run fiscal stance, and hence movements in the long-run equilibrium real exchangerate.Allthesefeaturesaresubsumed�nour‘steadystate’equ�l�br�um.

With these ideas in place, we can turn to what our results do say. The first sub-stant�vepo�ntfromTable6.1�sthatwhentheo�lrevenue�sfullyspent,andspent�nl�new�thopt�malpr�vatesectorconsumpt�onsmooth�ngcons�derat�ons(panelsAandB),therealadjustment�srelat�velymodest:therealexchangerateapprec�atesbybetween4.3and5.5percenton�mpactwh�leconsumpt�onr�sesbybetween3.5and4percenton�mpactbeforeadjust�ngsmoothlyto�tsor�g�nalsteadystatelevel.Thecontrast is on the nominal side: under the float, the real exchange rate appreciation �sach�evedbyacomb�nat�onofanom�nalexchangerateapprec�at�on(ofaround4percentage points on impact) and an initial fall in inflation (of around 1 percentage po�nt).Underthecrawl,bycontrast,g�venthestab�l�tyofthenom�nalexchangeraterelat�veto�tssteadystatepath,theapprec�at�onrequ�resasmalltrans�tory�ncrease�ninflation of around 2.3 per cent. In other respects there are no significant differences between the two adjustment paths: in both cases they describe an efficient adjustment toatemporarypos�t�veshock,w�thbothconsumpt�on(C)andthecurrentaccount


balance(ca)r�s�ngandthereal�nterestratefall�ngon�mpactandadjust�ngrelat�velysmoothlybacktowardsthe�requ�l�br�umvalues.

Matters change when the fiscal authorities choose to use some of the proceeds of the windfall to reduce the domestic financing requirement of the budget deficit. This fiscal adjustment has two effects. The first is that the stronger savings response strengthens the real exchange rate appreciation. But, second, the change in the fiscal stanceenta�lsasharpcontract�on�nbasemoneywh�ch, �nturn, �nducesadrop�nexpected inflation and increases the demand for domestic money relative to foreign currency, depending of course on the strength of the inflation elasticity of the demand for money. Under a floating exchange rate, however, this shift in the private sector’s portfol�o – away from fore�gn currency and towards domest�c – occurs aga�nst abackgroundwheretheCentralBankdoesnot�ntervenetoalterrelat�vesuppl�esofdomest�candfore�gncurrency:theent�reportfol�oadjustmentmustthereforetakeplacethroughthenom�nalexchangerate.AspanelC�nd�cates,thenom�nalexchangerateapprec�at�onrequ�redtofac�l�tatethedes�redportfol�oadjustment�sgreaterthantherealapprec�at�onrequ�redtoabsorbthew�ndfall.Asaresult,boththenom�naland real exchange rates overshoot wh�ch, w�th st�cky pr�ces, means that the non-tradedgoodssectorexper�encesasharpdemand-sw�tch�ngrecess�on.

Thecontrastw�thstrateg�es that �nvolvegreater �ntervent�on �ssharp. In termsof smoothing short-run volatility, of inflation, the exchange rate, output and interest rates, an aggressive crawl dramatically outperforms the clean float in this instance (panelD).Inpartth�s�sbecausethe�ntervent�onallowsthedes�redportfol�oadjust-menttotakeplacethroughquant�tyratherthanpr�ceadjustmentbut,more�mpor-tantly, because the intervention serves to limit the deviation of expected inflation from �ts long-runvalueandhence forestalls the short-runportfol�o sw�tch�ng thatso dominated outcomes under the float. How large this distinction is between a pure float and a crawl depends crucially on the underlying elasticity of demand for money with respect to expected inflation.

In practice, both the pure float and the aggressive crawl are polar extremes. In the final panel of Table6.1wecons�derausefulbenchmarkcasewh�chwerefertoasabuffer-plus-float. Inth�s�nstance,themonetaryauthor�t�esaccumulatereservesagainst that proportion of windfall allocated for deficit reduction but otherwise main-tain a floating exchange rate regime. This strategy, which probably comes closer toactualpract�cethane�theroftheothertworules,doesnottargetthepathoftheexchange rate directly as in the crawl, and hence exhibits rather more inflation and exchangeratevolat�l�ty,butnonethelessattacksthepr�nc�palsourceofthevolat�l�tyunder the pure float, namely the sharp short-run contraction in base money growth brought about by the fiscal saving decision. Under this rule, however, intervention is significantly less aggressive than required to stabilize the path of the nominal ex-change rate and inflation so that out-turns, for the parameters used here, lie some-where closer to the float than the crawl.

Tabl

e �.

1Im

puls

ere

spon

ses

toa

12.

5pe

rce

ntp

os�t�

ves

hock

too

�lpr

�ces

a

Per

iod�

(qua

rter

s)0

12

34

515

O�l

reve

nue

(%o

fto

talr

even

ue)

3.70

2.41

1.57

1.02

0.66

0.43

0.00

Pan

el A

: C

lean

floa

t, oi

l win

dfal

l ful

ly s

pent

Infla

tion

–1.0

6–0

.96

–1.5

3–1

.64

–1.5

2–1

.31

–0.0

9

Nom

�nal

exc

hang

era

teb

–4.1

0–0

.94

–1.1

6–1

.20

–1.0

9–0

.93

–0.0

6

Rea

lexc

hang

era

teb

–5.5

3–5

.49

–4.8

3–4

.03

–3.2

4–2

.59

–0.1

3

Rea

l�nt

eres

trat

e–1

.10

–1.2

0–1

.19

–1.0

6–0

.89

–0.7

3–0

.04

Non

-tra

dabl

eou

tput

0.54

0.17

0.04

–0.0

2–0

.04

–0.0

5–0

.01

Cur

rent

acc

ount

1.72

0.62

0.05

–0.2

2–0

.33

–0.3

4–0

.03

Pr�v

ate

spen

d�ng

4.05

3.53

2.96

2.39

1.89

1.46

0.07

Offi

cial

res

erve

s0.

000.

000.

000.

000.

000.

000.

00

Pan

el B

: C

raw

l, oi

l win

dfal

l ful

ly s

pent

Infla

tion

2.26

0.08

–0.4

8–0

.68

–0.7

6–0

.78

–0.4

7

Nom

�nal

exc

hang

era

teb

–0.1

5–0

.17

–0.2

2–0

.31

–0.3

8–0

.45

–0.4

4

Rea

lexc

hang

era

teb

–4.3

8–4

.84

–4.3

6–3

.67

–2.9

8–2

.38

0.23

Rea

l�nt

eres

trat

e–1

.08

–1.0

1–0

.99

–0.9

1–0

.78

–0.6

5–0

.05

Non

-tra

dabl

eou

tput

0.79

0.20

0.06

0.01

0.00

–0.0

1–0

.01

Cur

rent

acc

ount

1.95

0.81

0.18

–0.1

3–0

.27

–0.3

1–0

.07

Pr�v

ate

spen

d�ng

3.69

3.18

2.69

2.22

1.79

1.42

0.13

Offi

cial

res

erve

s2.

020.

420.

721.

091.

140.

99–0

.36

Tabl

e �.

1C

ont�n

ued

Per

iod�

(qua

rter

s)0

12

34

515

Pan

el C

: C

lean

floa

t, oi

l win

dfal

l par

tially

spe

nt

Infla

tion

–12.

94–4

.49

–3.7

3–2

.98

–2.3

2–1

.78

–0.0

8

Nom

�nal

exc

hang

era

teb

–17.

41–3

.56

–3.0

1–2

.38

–1.8

2–1

.37

–0.0

6

Rea

lexc

hang

era

teb

–8.1

4–6

.45

–5.2

2–4

.14

–3.2

2–2

.46

–0.1

2

Rea

l�nt

eres

trat

e–1

.10

–1.4

6–1

.32

–1.1

0–0

.89

–0.7

0–0

.04

Non

-tra

dabl

eou

tput

–0.5

5–0

.19

–0.1

5–0

.14

–0.1

2–0

.09

–0.0

1

Cur

rent

acc

ount

1.49

0.51

0.03

–0.1

9–0

.28

–0.2

9–0

.03

Pr�v

ate

spen

d�ng

4.15

3.63

2.93

2.31

1.78

1.36

0.06

Offi

cial

res

erve

s0.

000.

000.

000.

000.

000.

000.

00

Pan

el D

: C

raw

l, oi

l win

dfal

l par

tially

spe

nt

Infla

tion

1.15

–1.0

1–1

.66

–1.8

8–1

.96

–1.9

5–1

.10

Nom

�nal

exc

hang

era

teb

–0.8

9–1

.25

–1.4

6–1

.58

–1.6

5–1

.68

–1.0

7

Rea

lexc

hang

era

teb

–3.7

3–4

.15

–3.7

8–3

.23

–2.6

9–2

.21

–0.3

6

Rea

l�nt

eres

trat

e–0

.97

–0.8

5–0

.82

–0.7

4–0

.64

–0.5

3–0

.05

Non

-tra

dabl

eou

tput

0.73

0.19

0.06

0.01

–0.0

1–0

.02

–0.0

1

Cur

rent

acc

ount

2.18

1.03

0.36

0.01

–0.1

7–0

.25

–0.1

0

Pr�v

ate

spen

d�ng

3.22

2.76

2.35

1.96

1.61

1.31

0.21

Offi

cial

res

erve

s12

.24

5.35

3.13

1.94

1.06

0.39

–1.0

3

Pan

el E

: B

uffe

r pl

us fl

oat,

oil w

indf

all p

artia

lly s

pent

Infla

tion

–5.4

4–2

.84

–2.3

1–3

.55

–2.6

9–2

.02

–0.0

8

Nom

�nal

exc

hang

era

teb

–7.4

9–2

.61

–1.9

8–2

.95

–2.1

8–1

.61

–0.0

6

Rea

lexc

hang

era

teb

7.45

6.44

5.27

4.18

3.24

2.48

0.12

Rea

l�nt

eres

trat

e–1

.61

–1.4

9–1

.30

–1.0

9–0

.88

–0.6

9–0

.04

Non

-tra

dabl

eou

tput

–0.0

8–0

.09

–0.1

0–0

.08

–0.1

6–0

.11

–0.0

7

Cur

rent

acc

ount

1.45

0.52

0.04

–0.1

9–0

.27

–0.2

8–0

.03

Pr�v

ate

spen

d�ng

4.37

3.61

2.89

2.28

1.76

1.34

0.06

Offi

cial

res

erve

s7.

722.

321.

871.

230.

800.

520.

00

a Im

puls

e re

spon

ses

are

repo

rted

as

perc

enta

ge p

oint

s fo

r in

flatio

n, t

he n

omin

al a

nd r

eal

rate

s an

d th

e in

tere

st r

ate.

All

othe

r va

riab

les

are

mea

sure

d as

per

cent

age

poin

t de

v�at

�ons

fro

ms

tead

yst

ate

valu

es.S

eeA

ppen

d�x

Tabl

e6.

A1.

b

An

�ncr

ease

�nth

eno

m�n

ala

ndr

eale

xcha

nge

rate

�nd�

ces

deno

tes

ade

prec

�at�o

n.

Per

iod�

(qua

rter

s)0

12

34

515

Pan

el C

: C

lean

floa

t, oi

l win

dfal

l par

tially

spe

nt

Infla

tion

–12.

94–4

.49

–3.7

3–2

.98

–2.3

2–1

.78

–0.0

8

Nom

�nal

exc

hang

era

teb

–17.

41–3

.56

–3.0

1–2

.38

–1.8

2–1

.37

–0.0

6

Rea

lexc

hang

era

teb

–8.1

4–6

.45

–5.2

2–4

.14

–3.2

2–2

.46

–0.1

2

Rea

l�nt

eres

trat

e–1

.10

–1.4

6–1

.32

–1.1

0–0

.89

–0.7

0–0

.04

Non

-tra

dabl

eou

tput

–0.5

5–0

.19

–0.1

5–0

.14

–0.1

2–0

.09

–0.0

1

Cur

rent

acc

ount

1.49

0.51

0.03

–0.1

9–0

.28

–0.2

9–0

.03

Pr�v

ate

spen

d�ng

4.15

3.63

2.93

2.31

1.78

1.36

0.06

Offi

cial

res

erve

s0.

000.

000.

000.

000.

000.

000.

00

Pan

el D

: C

raw

l, oi

l win

dfal

l par

tially

spe

nt

Infla

tion

1.15

–1.0

1–1

.66

–1.8

8–1

.96

–1.9

5–1

.10

Nom

�nal

exc

hang

era

teb

–0.8

9–1

.25

–1.4

6–1

.58

–1.6

5–1

.68

–1.0

7

Rea

lexc

hang

era

teb

–3.7

3–4

.15

–3.7

8–3

.23

–2.6

9–2

.21

–0.3

6

Rea

l�nt

eres

trat

e–0

.97

–0.8

5–0

.82

–0.7

4–0

.64

–0.5

3–0

.05

Non

-tra

dabl

eou

tput

0.73

0.19

0.06

0.01

–0.0

1–0

.02

–0.0

1

Cur

rent

acc

ount

2.18

1.03

0.36

0.01

–0.1

7–0

.25

–0.1

0

Pr�v

ate

spen

d�ng

3.22

2.76

2.35

1.96

1.61

1.31

0.21

Offi

cial

res

erve

s12

.24

5.35

3.13

1.94

1.06

0.39

–1.0

3

Pan

el E

: B

uffe

r pl

us fl

oat,

oil w

indf

all p

artia

lly s

pent

Infla

tion

–5.4

4–2

.84

–2.3

1–3

.55

–2.6

9–2

.02

–0.0

8

Nom

�nal

exc

hang

era

teb

–7.4

9–2

.61

–1.9

8–2

.95

–2.1

8–1

.61

–0.0

6

Rea

lexc

hang

era

teb

7.45

6.44

5.27

4.18

3.24

2.48

0.12

Rea

l�nt

eres

trat

e–1

.61

–1.4

9–1

.30

–1.0

9–0

.88

–0.6

9–0

.04

Non

-tra

dabl

eou

tput

–0.0

8–0

.09

–0.1

0–0

.08

–0.1

6–0

.11

–0.0

7

Cur

rent

acc

ount

1.45

0.52

0.04

–0.1

9–0

.27

–0.2

8–0

.03

Pr�v

ate

spen

d�ng

4.37

3.61

2.89

2.28

1.76

1.34

0.06

Offi

cial

res

erve

s7.

722.

321.

871.

230.

800.

520.

00

a Im

puls

e re

spon

ses

are

repo

rted

as

perc

enta

ge p

oint

s fo

r in

flatio

n, t

he n

omin

al a

nd r

eal

rate

s an

d th

e in

tere

st r

ate.

All

othe

r va

riab

les

are

mea

sure

d as

per

cent

age

poin

t de

v�at

�ons

fro

ms

tead

yst

ate

valu

es.S

eeA

ppen

d�x

Tabl

e6.

A1.

b

An

�ncr

ease

�nth

eno

m�n

ala

ndr

eale

xcha

nge

rate

�nd�

ces

deno

tes

ade

prec

�at�o

n.


Exactlywhereth�soutcomel�es�sless�mportantthanthe�mpl�cat�ons,twoofwhich are worth stressing. The first is that the outcome is consistent with well es-tablished views about efficient exchange rate responses to shocks which focus on the superiority of flexible exchange rates to current account (real) shocks and fixed or crawl�ng rates to portfol�o shocks.Although the or�g�nat�ng shock �n th�s case�s a current account, terms-of-trade, shock, macroeconom�c volat�l�ty stems froma portfolio shock arising from the change in expected inflation and seigniorage re-quirements. To the extent that the intervention element of the buffer-plus-float goessome way to smoothing the impact of deficit reduction choices on the path for future se�gn�oragerequ�rements,theotherw�sed�srupt�veportfol�oadjustment�sallowedtotakeplacemoresmoothly.

The second point is that, while the buffer-plus-float maynotbequ�teaseffect�veastheaggress�vecrawl�ntermsofl�m�t�ngshort-run�nstab�l�ty,�t�snonethelesscon-s�stentw�thanotherobject�veoftheCentralBank,namelytopromoteamoremarket-based integrated foreign exchange rate. The buffer-plus-float strategy commits the CentralBankto�ntervenew�threspectsolelytothatport�onoftheo�lw�ndfallthatis saved but to observe a float with respect to all other sources of volatility and, more specifically, to sterilize the liquidity injections arising from the spending out of the windfall through foreign exchange sales (that is, a float).

6.4.2� Extending�the�analysis�

Theresults�nTable6.1prov�deavaluablebackgroundwh�challowsustofocusonsomekeyaspectsoftheproblem.Inwhatfollows,however,wecons�derasl�ghtlyw�derrangeofpol�cyopt�onsbut�nthe�nterestsofclar�tywereportonlythemostsal�entresults.Indo�ngsoweforgothedeta�ledexam�nat�onofthe�mpulseresponsefunct�onspresented�nTable6.1andreport�nsteadthevolat�l�tyofthevar�ablesof�nterest.11

We start by considering two particular variations of the fiscal response. First we assumethatthespend�ngpatternsoutofthew�ndfallareheav�lyb�asedtowardsnon-tradable goods. Second, and possibly in response to this, we assume that the fiscal authorities seek to smooth the profile of aggregate spending relative to the windfall. S�nce�tmaynotbereasonabletoassumethatth�soccursatalllevelsofgovernment,thedegreeofsmooth�ngthatcanbeach�eved�stakentoberelat�velymoderate.Inpart�cularweassumethatpressurestospendmeanthatsmooth�ngfallssomelongwayshortofarulewh�chwouldt�econsumpt�ontothepermanent�ncomear�s�ngfromthew�ndfall.

Spending and smoothing

Table6.2summarizes the effects of altering these fiscal choices where in this case, rather than focusing on the profile of a single shock, we report the implied analyti-cal standarddev�at�ons from thes�mulatedmodel.Compar�ngpanelBw�thpanel


A, two features stand out. The first is that the higher is the propensity to spend on non-tradables,thegreater�sthevolat�l�ty�ntherealexchangerate,regardlessofthenom�nalexchangeratereg�me.Althoughnotreported�nthetable,the�mpactappre-c�at�onoftherealexchangerate�salmosttw�ceaslargeasshown�nTable6.1.Th�sd�fferent�albehav�our�sonlypartlyrelatedtotheassumpt�onthatgovernmenthasastronger baseline preference for non-tradables per se. Rather it reflects the difference between‘rule-based’character�zat�onofpubl�cexpend�tureandtheextenttowh�chthis differs from the private sector’s spending decisions which entail an efficient al-terat�onofthecompos�t�onofspend�ng,both�nter-sectorallyand�nter-temporally�nresponsetoatemporary�ncomew�ndfall.As�m�larpatternofresponseemergeseven�fweassumethatthepubl�csector’sspend�ngatthemarg�n�sb�asedtowardsthetradablesector.Themessage,therefore,�sthatrule-based‘myop�c’publ�cspend�ngbehav�ourgeneratesh�gherrealexchangeratevolat�l�tythan�fthespend�ngdec�s�onoutofthew�ndfallwerehandledbyanopt�m�z�ngpr�vatesectorrepresentat�veagent.ThesecondfeatureofpanelB�sthatthesw�tch�ndemandatthemarg�ntowardsnon-tradables eases the up-front deflationary pressure that otherwise is present in Table6.1and hence reduces the inflation and nominal exchange rate volatility. Hence the benefits of intervention relative to the float are somewhat weakened although, astheev�dencefromthelastthreecolumnssuggests,thepressuresar�s�ngfromtheportfolio adjustment when the windfall is partly used for deficit reduction remain significant.

Aggregate expenditure smoothing on the part of the fiscal authorities also eases thepressureonmonetarypol�cyandnarrowsthegapbetweentheexchangeraterules(Table6.2,panelC).However,g�venthemodestdegreeofsmooth�ngcons�dered�nour experiments these effects are not dramatic and certainly not sufficient on their owntoremovethe�nstab�l�tycausedbytheeffectoflatentpressuresforportfol�oadjustment.

Bond sterilization and debt buy-backs

Whenexchange rate rulesembody �ntervent�on �t �scommonpract�ce tocons�der�ssuesofbondster�l�zat�on.Thelog�c�ss�mple:�ntervent�on�mpl�esagrowth�nnetfore�gnassetsrelat�ve to thecounterfactualandhence,other th�ngsbe�ngequal,agrowth in base money. This is certainly the case in debates on managing aid inflows (see,forexample,IMF2005a)andwouldappeartobeaperenn�alconcern�nN�ger�a(IMF2005b).However,asTable6.1�nd�cates,whenano�lw�ndfall�saccompan�edby a significant fiscal savings response, base money actually contracts in nominal terms relat�ve to thecounterfactual.Theconvent�onal rat�onale forbondster�l�za-t�ondoesnotseemqu�tesorelevantheres�ncenon-ster�l�zed�ntervent�ondel�versasmooth path for base money as well as delivering a fair degree of stability in inflation and the exchange rate. Indeed as the first two columns of Table6.3,panelA,�nd�cate,add�t�onalbondster�l�zat�on,�nth�scaseequ�valentto50percentofthe�ntervent�on,

Tabl

e �.

� St

anda

rd d

evia

tions

und

er a

ltern

ativ

e fis

cal a

nd m

onet

ary

rule

s: r

espo

nses

to a

12.

5 pe

r ce

nt s

hock

to o

il pr

ices

a

Per

iod�

(qua

rter

s)

Win

dfal

l�ful

ly�s

pent

Win

dfal

l�par

tial

ly�s

pent

Flo

atC

raw

lF

loat

Cra

wl

Buf

fer

plus

floa

t

Pan

el A

: St

anda

rd d

evia

tions

from

Tab

le �

.1

Infla

tion

3.76

3.54

14.9

36.

879.

22

Nom

�nal

exc

hang

era

teb

4.90

2.14

18.4

06.

3410

.93

Rea

lexc

hang

era

teb

11.2

49.

9413

.28

8.86

10.9

1

Rea

l�nt

eres

trat

e2.

702.

392.

872.

013.

09

Non

-tra

dabl

eou

tput

0.58

0.81

0.64

0.76

0.40

Cur

rent

acc

ount

1.97

2.24

1.70

2.55

1.77

Pr�v

ate

spen

d�ng

7.20

6.66

7.18

5.93

7.27

Offi

cial

res

erve

s0.

003.

310.

0014

.50

8.43

Pan

el B

: E

xpen

ditu

re b

iase

d to

war

ds n

on-t

rada

bles

Infla

tion

4.89

5.93

10.5

87.

238.

03

Nom

�nal

exc

hang

era

teb

2.94

0.76

16.1

95.

1312

.36

Rea

lexc

hang

era

teb

19.8

719

.57

19.8

715

.95

17.4

9

Rea

l�nt

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trat

e1.

210.

921.

200.

791.

12

Non

-tra

dabl

eou

tput

1.89

2.29

0.50

1.85

0.96

Cur

rent

acc

ount

1.99

1.93

1.72

2.31

1.68

Pr�v

ate

spen

d�ng

3.29

3.18

4.09

3.34

3.85

Offi

cial

res

erve

s0.

008.

630.

0016

.65

8.43

Pan

el C

: As

Pan

el B

with

fisc

al s

moo

thin

g

Infla

tion

2.24

3.82

12.5

76.

367.

68

Nom

�nal

exc

hang

era

teb

3.89

0.97

17.3

35.

368.

55

Rea

lexc

hang

era

teb

18.4

217

.97

18.4

614

.86

9.07

Rea

l�nt

eres

trat

e0.

951.

051.

140.

961.

49

Non

-tra

dabl

eou

tput

0.64

1.11

0.58

0.98

0.24

Cur

rent

acc

ount

2.76

2.73

2.29

2.91

2.26

Pr�v

ate

spen

d�ng

2.96

2.92

3.84

3.16

3.91

Offi

cial

res

erve

s0.

007.

980.

0017

.27

8.43

aSt

anda

rdd

ev�a

t�ons

mea

sure

das

per

cent

age

po�n

ts.

bA

n�n

crea

se�n

the

nom

�nal

and

rea

lexc

hang

era

te�n

d�ce

sde

note

sa

depr

ec�a

t�on.

Tabl

e �.

�St

anda

rdd

ev�a

t�ons

and

�mpu

lse

resp

onse

sw

�thb

ond

ster

�l�za

t�on:

res

pons

esto

a1

2.5

per

cent

sho

ckto

o�l

pr�c

esa

Win

dfal

l�ful

ly�s

pent

Win

dfal

l�par

tial

ly�s

pent

Pan

el A

: A

s Ta

ble

�, P

anel

A w

ith b

ond

ster

iliza

tion

Cra

wl

Cra

wl

Cra

wl�w

ith�

debt

�buy

back

Infla

tion

3.27

9.04

5.80

Nom

�nal

exc

hang

era

teb

1.94

8.31

6.73

Rea

lexc

hang

era

teb

9.91

9.07

8.08

Rea

l�nt

eres

trat

e2.

282.

361.

45

Non

-tra

dabl

eou

tput

0.78

0.84

0.57

Cur

rent

acc

ount

2.30

2.29

2.92

Pr�v

ate

spen

d�ng

6.60

6.24

5.78

Offi

cial

res

erve

s5.

937.

7833

.22

Publ

�cd

ebt

6.19

40.1

321

.59

Pan

el B

: Im

puls

e re

spon

se fu

nctio

ns w

ith r

ever

se s

teri

lizat

ionc

Per

iod�

(qua

rter

s)0

12

34

515

O�l

reve

nue

(%o

fto

talr

even

ue)

3.70

2.41

1.57

1.02

0.66

0.43

0.00

Cra

wl,

oil w

indf

all p

artia

lly s

aved

, no

ster

iliza

tion

[Tab

le 1

, Pan

el D

]

Infla

tion

1.15

–1.0

1–1

.66

–1.8

8–1

.96

–1.9

5–1

.10

Rea

lexc

hang

era

teb

–3.7

3–4

.15

–3.7

8–3

.23

–2.6

9–2

.21

–0.3

6

Rea

l�nt

eres

trat

e–0

.97

–0.8

5–0

.82

–0.7

4–0

.64

–0.5

3–0

.05

Pr�v

ate

spen

d�ng

3.22

2.76

2.35

1.96

1.61

1.31

0.21

Cra

wl,

oil w

indf

all p

artia

lly s

aved

, rev

erse

ste

riliz

atio

n

Infla

tion

–0.0

6–1

.67

–2.0

6–2

.09

–1.9

9–1

.83

–0.5

8

Rea

lexc

hang

era

teb

–4.1

7–4

.24

–3.9

7–3

.44

–3.0

5–2

.61

–0.3

8

Rea

l�nt

eres

trat

e–0

.31

–0.3

8–0

.53

–0.5

7–0

.56

–0.5

1–0

.03

Pr�v

ate

spen

d�ng

3.76

3.22

2.75

2.06

1.78

1.51

0.33

a,b

See

Tab

les

6.1

and

6.2.

c

Deb

tbuy

back

�se

qu�v

alen

tto

50p

erc

ento

fth

esa

v�ng

out

of

the

o�lw

�ndf

all.


del�versamarg�nalreduct�on�nrealexchangeratevolat�l�tybutatthecostofsome-whath�gherpr�ce,exchangerateand�nterestratevolat�l�ty.Publ�cdebtmanagementforthepurposeofster�l�zat�on,therefore,doesnotappeartohavesubstant�alga�ns.

Lookedatfromtheothers�de,however,th�sanalys�ssuggeststhattheremaybe�mportantga�ns toreverse sterilization �n suchc�rcumstances.As the lowerpanelofTable6.3shows,ours�mpleshort-runmodelsuggeststhatadebtbuy-backmayleadtoamarg�nallystrongershort-runrealexchangerateapprec�at�onbutth�s�ssetoffaga�nstalowerreal�nterestratetrajectoryoverthel�fet�meoftheshock.W�thnoexpl�c�tmodell�ngofthesupplys�deoftheeconomy,thereal�nterestrate�nth�smodelservessolelyas therelat�vepr�cebetweenpresentandfutureconsumpt�on.Thelowerpathforthereal�nterestratethereforeservesto‘t�lt’consumpt�ontowardsthe present. However, in a medium model in which investment figures, the same pro-file represents an incentive to invest. The debt buy-back in this instance corresponds d�rectlytotheproposaladvancedbyColl�erandGunn�ng(2005)andd�scussed�nChapter2.

Using a temporary oil windfall to finance a debt buy-back may be attractive for other reasons. Buffie et al. (2006)cons�dertheanalogouscaseus�ng(partof)ana�dsurge to finance a domestic debt buy-back in circumstances where government com-mitments to reduce public spending once the aid inflow has passed are less than fully credible. A fear of higher future domestic deficits reduces the private sector’s willing-nessto�ncrease�tscurrentdemandformoneyand�ncreases�ts�ncent�vestoresortto capital flight, thereby unwinding the benefits from the aid inflow. In these circum-stances,adebtbuy-backprov�desthegovernmentextrat�metoadjustexpend�tureastheboompassess�ncetheCentralBankcanresellthebonds�nthefuturetocontrolthe temporary growth in domestic credit to government that will occur if the fiscal author�t�esstruggletoreal�gnexpend�turesw�ththenewlowerlevelofa�d.Thedebtbuy-back by the Central Bank in anticipation of a future surge in domestic deficit fi-nanc�ngthusprov�desthemechan�smtoquellthepr�vatesector’spess�m�st�cexpec-tations concerning future financing. A directly analogous situation faces the Central Bank�nN�ger�a.O�lrevenue�svolat�leandgovernmentcomm�tmentstofullyal�gnexpend�turetofuturerevenuesarerarelyfullycred�ble(even�nthepresenceof�nst�-tut�onssuchastheFRB).Monetarypol�cyalonecannotsolvethecred�b�l�typroblembut, with a suitable degree of fiscal discipline, can help to contain it.

6.5� Conclusions�

Inthelastfewyears,N�ger�ahastaken�mportantstepstobu�ld�ngsol�dfoundat�onsforeffect�vemacroeconom�cmanagementofo�lrevenues.Wh�leacoherentmon-etary policy will always require a compatible fiscal stance, demonstrable success in monetary management in current circumstances when a substantial measure of fiscal

Monetary Policy and Oil Price Surges in Nigeria 1�1

controldoespreva�l can fuel �ts ownv�rtuous c�rcle, allow�ng theCentralBank’sdefacto independence to be enhanced and inflation expectations to be more firmly anchored�nthefuture.

Thecred�b�l�tyofmonetarypol�cymustbeestabl�shedacrossarangeof�ssuesand�nthefaceofvolat�l�tyfromavar�etyofsources.Inth�schapter,wehavefocusedononepart�cularaspectofthechallengefac�ngtheCentralBank,byexam�n�ngthepropert�esofarangeofalternat�vestrateg�esforexchangerate�ntervent�onandbondster�l�zat�on�nthefaceofvolat�leo�lrevenues.Ouranalys�ssuggeststhatstrateg�esthat stabilize the path of domestic financing for a given fiscal response to the oil w�ndfall haveattract�vepropert�es relat�ve to a rangeof convent�onal alternat�ves�nclud�ngthose�nvolv�ngheavyrel�anceonbondster�l�zat�onandvar�antsofapurefloat. This is particularly the case if the fiscal authorities seek to save some portion of the windfall. Efficient alignment can be achieved by simple rules that match foreign exchange sterilization (that is, floating) directly to fiscal spending of the windfall wh�lebank�ngtheunspentport�on.However,anaggress�vecrawla�medatkeep�ngthe rate of nominal exchange rate depreciation close to the long-run inflation target (a var�antofarealexchangeratetarget)turnsouttoberathermoreeffect�veatreduc�ngshort-runrealandnom�nalvolat�l�ty.Theattract�vefeaturesofthecrawl�nth�sspe-cific instance may, however, be over-sold if, in addition to targeting macroeconomic volat�l�ty,theauthor�t�esarealsoconcernedtodevelopthestructuralperformanceofdomestic finance markets by promoting greater market-based exchange rate deter-m�nat�on.

Thesecondma�nmessage�sthattheconvent�onalcasefordomest�cbondster�-lization may need to be modified, particularly when a reasonable degree of fiscal d�sc�pl�ne�s�nplace.Thecomb�nat�onof�ncomegrowthandareduct�on�nexpectedinflation arising from fiscal consolidation serve to increase the demand for domestic money thereby warranting the growth in base money arising from growth in official net �nternat�onal reserves.Bycontrast,however, theremaybea strongercase forreversester�l�zat�one�therasameanstost�mulatepr�vate�nvestmentorasawayofproviding some insurance against future deficit financing demands.

Theresearchandpol�cyagendascons�dered�nth�schapterarefarfromexhaust-ed.Cr�t�cally,theresultsand�ns�ghtsd�scussedherearemodelbasedand,asw�thall such exercises, are sensitive to underlying assumption. Although we are confident thattheassumpt�onsmadethroughoutth�schapteraresens�ble,goodpract�ceobv�-ouslydemandsthatthesebetestedforrobustness.Notw�thstand�ng,themodelusedherecanbeextended�nanumberofd�rect�onsasc�rcumstancesd�ctate.Forexam-ple, it will be useful to examine the robustness of the simple policy rules as financial sector reforms take root and the pr�vate sector’s asset demands evolve. S�m�larlyfor changes in fiscal structures and policies. The framework can also be readily ex-tendedtoallowtheauthor�t�estobeconfrontedbyadd�t�onalsourcesofvolat�l�ty,for


examplecl�mate-�nducedvar�ab�l�ty�nagr�culturaloutput.F�nally,themodelcouldeventually be modified to reflect operating concerns as the authorities move closer to flexible inflation targeting.

Notes

1 This chapter draws heavily on joint work with Stephen O’Connell, Ed Buffie and Cather-�nePatt�llo(see,forexample,Adamet al., 2006, Buffie et al., 2006,andO’Connellet al., 2006).Wefullyacknowledgeoursubstant�aldebtstoallthreebutstressthatanyrema�n-�ngerrorsofcomm�ss�onandom�ss�onareourownrespons�b�l�ty.Wethankpart�c�pantsattheAbujaconferenceforvaluablecommentsonanearl�erdraftofth�schapter.WealsoacknowledgethesupportoftheUKEconom�candSoc�alResearchCounc�l(ESRC)un-derprojectRES-156-25-0001Managing Macroeconomic Risks in Developing Countries: Policies and Institutions.

2 SeeforexampleIMF(2004,2005b)andCentralBankofN�ger�a(2006).It�sclearfromthesereportsthatboththeauthor�t�esandtheIMFhavebeenpart�cularlyexerc�sedw�ththeappropr�ateresponseto‘excess’spend�ngoutofo�lw�ndfallsand�npart�cularhowaggress�velytheauthor�t�esshouldseektomopupexcessl�qu�d�tythroughthedomest�cdebtmarket.

3 D�rect spend�ngon �mports �s self-ster�l�z�ngandhencehasno �mpacton thedomest�cdeficit financing requirements of government.

4 Avers�onofth�smodel�salsodescr�bed�nAdamet al. (2006). 5 Wedonotd�st�ngu�shbetweenbankandnon-bankhold�ngsofmoneywh�chprecludesa

cons�derat�onoftheroleofreserverequ�rementsasan�nstrumentofmonetarypol�cy. 6 Nonetheless,theseshort-runshocksthemselvesarepers�stent. 7 Note that since we work with the consolidated budget this is an aggregate rate of fiscal

sav�ngand�scons�stentw�thd�fferent�alratesofsav�ngbystateandfederallevelsofgov-ernment.

8 The intervention equation can also be defined in terms of the real exchange rate. Issues of realexchangeratetarget�ngare�mportantelements�nthecurrentd�scuss�on.

9 Unt�ltheo�lrevenue�sspentthew�ndfallhasno�mpactonse�gn�orage,becausenet�nter-nat�onalreservesandneto�lproceedseachchangebythesameamount.Asthew�ndfallrevenue is spent (increasing the fiscal deficit), the import component of spending continues toleavedomest�cl�qu�d�tyunchangedbecausenet�nternat�onalreservesfallbythe�mportcomponent of the rise in the fiscal deficit (while, in the background, net domestic credit r�sesbythesameamount).Thel�qu�d�ty�nject�onassoc�atedw�ththeo�lw�ndfallcorre-sponds to the non-import component of windfall spending. A buffer-plus-float policy uses fore�gnexchangesalestoster�l�zeth�s�nfull,leav�ngse�gn�orageunchanged.

10 Analternat�ve,broadlyequ�valent,formulat�onofthester�l�zat�onrulewouldl�nkster�-l�zat�ond�rectlytothegrowthrateofdomest�cl�qu�d�tyratherthanthelevelof�nterven-t�on.

11 Thesevolat�l�t�es(standarddev�at�ons)correspondtotheanalyt�calstandarddev�at�onsofthemodelvar�ableswhenthemodel�ssubjectedtoasequence ofo�lshocksoftheformanalysed�nTable6.1.Acompletesetofresults�sava�lableonrequest.


References

Adam, Christopher, Stephen O’Connell, Edward Buffie and Catherine Pattillo, 2006, ‘Monetary ResponsestoA�dSurges�nAfr�ca’,paperpresentedatWIDERconferenceonA�dPol�c�esandPr�nc�ples, Hels�nk�,June2006.

Bat�n�,N�coletta,2004,‘Ach�ev�ngandMa�nta�n�ngPr�ceStab�l�ty�nN�ger�a’,IMFWork�ngPaper 04/97,Wash�ngton,DC.

Buffie, Edward, Christopher Adam, Stephen O’Connell and Catherine Pattillo, 2006, ‘Fiscal Inert�a,DonorCred�b�l�tyandtheMonetaryManagementofA�dSurges’,m�meo,DepartmentofEconom�cs,Ind�anaUn�vers�ty,Bloom�ngton,IN.

Calvo,G.,1983,‘StaggeredPr�ces�naUt�l�ty-Max�m�z�ngFramework’,Journal of Monetary Economics12(3),983–998.

CentralBankofN�ger�a,2006,Economic Report for the First Half of �00�,Abuja:CentralBankofN�ger�a.

Coll�er,PaulandJanW�llemGunn�ng,2005, ‘AssetPol�c�esDur�nganO�lW�ndfall:SomeS�mpleAnalyt�cs’,The World Economy 28(10),1401–1415.

IMF,2004,‘N�ger�a:2004Art�cleIVConsultat�on—StaffReport’,IMFCountryReport04/239,IMF,Wash�ngton,DC.

IMF,2005a,‘TheMacroeconom�csofScal�ngupA�d:LessonsfromRecentExper�ence’,byAndrewBerg,ShekharA�yar,MumtazHussa�n,ShaunRoache,Tokh�rM�rzoevandAmberMahone,IMFOccas�onalPapers253,IMF,Wash�ngton,DC.

IMF, 2005b, ‘N�ger�a: 2005 Art�cle IV Consultat�on—Staff Report’, IMF Country Report05/302,IMF,Wash�ngton,DC.

IMF,2005c,‘N�ger�a:SelectedIssuesandStat�st�calAppend�x’,IMFCountryReport05/303,IMF,Wash�ngton,DC.

O’Connell, Stephen, Christopher Adam, Edward Buffie and Catherine Pattillo, 2006, ‘Managing ExternalVolat�l�ty:Pol�cyOpt�onsforCentralBanks�nLowIncomeCountr�es’,�nN�colettaBat�n�(ed.),Monetary Policy in Emerging Markets and Other Developing Countries,NewYork: Nova Scientific Publishers.

Appendix Table �.A1 Modelcal�brat�onvalues

Parameter Values

Non-tradableshare(%pr�vatespend�ng) 50.0

Pr�vatespend�ng(%GDP) 77.0

Official reserves (% GDP) 12.0

Fore�gncurrency(%GDP) 8.0

Domest�ccurrency(%GDP) 17.0

Domest�cdebt(%GDP) 20.0

Real�nterestrate(%perannum) 5.0

Inflation (% per annum) 10.0

Implied values

Nom�nal�nterestrate(%perannum) 15.5

Inflation elasticity of money demand 0.45

Source:IMF(2005b).


Sala-�-Mart�n,Xav�erandArv�ndSubraman�an,2003,‘Address�ngtheNaturalResourceCurse:AnIllustrat�onfromN�ger�a’,IMFWork�ngPaper 03/139,Wash�ngton,DC.

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